I'm the Beijing Bureau Chief for Forbes. I joined the magazine in Bangkok where I covered Southeast Asian business and politics for over a decade, taking me deep into the weeds in Indonesia, Myanmar and Thailand. In my new role I blog on all things China, from tech whizz success to political bottlenecks and botched acquisitions.

Suited-Up Online: Why China's Fashionista Websites Aim High (And Low)

As a software engineer David Zhao was happy wearing jeans and a T-shirt, day in, day out. After his fashion website launched in 2010, he had to reboot his wardrobe to sweeten his pitch to international luxury brands whose apparel he wanted to hawk online. These days Zhao wears designer knitwear and Italian brogues, a taste of the fancy imported fashion sold on his e-commerce site, Shangpin. But the 40-year-old Beijing CEO is still a geek at heart. “I’m an outsider to fashion circles,” he says.

Other entrepreneurs are making a similar journey to the fashion world, lured by the promise of e-commerce in China, forecast by Boston Consulting Group (BCG) to be worth $370 billion in 2015, up from $74 billion in 2010. The sector’s commanding heights belong to Alibaba, 360buy.com and a handful of other, well-financed general sites. But that leaves plenty of space for specialist websites to expand by offering goods and services to consumers looking for alternatives. Fashion is China’s biggest e-commerce category.

International fashion retailers are rushing to set up virtual shops in China, providing competition to domestic players like tiny Shangpin and larger, Nasdaq NYSE-listed VIPshop, which uses flash sales to move midpriced apparel. Newcomers include upscale U.S. department store icon Neiman Marcus, Britain’s Net-a-Porter and Yoox.com, an Italian specialist in end-of-season sales. Neiman Marcus of Dallas agreed last year to invest $29.4 million in Glamour Sales Holdings, a Hong Kong operator of flash-sale sites in Japan and China. Net-a-Porter took a similar approach by acquiring Shouke.com for $10 million and launching a Chinese service.

For price-conscious youth, China’s Vancl–closely held, like Shangpin, but much larger–sells no-frills apparel in the style of Japanese chain Uniqlo and Sweden’s H&M. It had revenues of nearly $1 billion in 2011, according to a spokesman. Its brand is known for celebrity endorsers like Han Han, a motorcar racer and prolific blogger. Since its launch in 2007 it has raised $430 million in funding from IDG, Softbank and Qiming Ventures. But its plans for an initial public offering in the U.S. in 2011 were put on hold as investors cooled on Chinese e-commerce valuations. VIPshop’s share sale was one of only two successful Chinese IT listings in 2012. It was initially judged a flop when the stock slumped on its debut but has since doubled in value.

The big prize in China is a luxury goods market that has exploded, with new wealth seeking style and status. After a slower 15% growth spurt last year, CLSA predicts a 20% jump in luxury consumption in 2013. Online retailers see only a fraction of this spending, in part because of concerns over fake goods on Chinese websites. Another reason is that shopping for bling is part of the fun, says Aaron Fischer, head of Asian consumer research at CLSA in Hong Kong. “People are still looking for brand experience of going to luxury stores. They value this,” he says.

However, luxury brands pursuing a bricks-and-mortar strategy in China could be missing out on shoppers living outside showcase cities. Shangpin’s Zhao says that many of its spendthrift customers live in smaller, inland cities where luxury malls are few and far between. Incomes have been rising rapidly in these so-called second- and third-tier cities, outpacing the rollout of upscale retail outlets on a par with Beijing and Shanghai. “It’s hard to approach these cities without good distribution channels,” says Zhao, who raised $60 million in capital for Shangpin. Sales are only $30 million, he says, but he’s chosen to protect margins.

Online shopping offers a platform for new fashion brands to enter China, without the expense and risk of opening physical stores. Even deep-pocketed fashion houses face a challenge in planting a flag in China’s frothy real estate market. “All the good locations have been taken by the big brands,” says Angelica Cheung, editor of Vogue China , which has a partnership to promote local designers on Yoox.com’s Chinese website.

Some fashion vendors have a foot in both camps. Lane Crawford, the glitzy Hong Kong department store owned by real estate billionaire Peter Woo and overseen by his daughter Jennifer, has two units in Beijing. It also operates a popular Chinese website that offers same-day delivery in major cities, with free styling advice by phone.

Hong Kong has profited from China’s newfound taste for luxury brands, which are heavily taxed over the border. BCG estimates that 58% of Chinese spending on luxury goods and services is done overseas, where prices are as much as 40% lower than at home. This creates an arbitrage opportunity that various players are seeking to exploit.

U.S. e-commerce giant eBay last November launched a partnership with xiu.com, an online store, to promote new fashion items sold on eBay by 3,800 top vendors. The advantage for Chinese buyers is that goods are mailed to a warehouse in Dallas and bulk-shipped to China, saving on postage costs, with 10 to 14 days of delivery time. Xiu.com will handle shipping and returns, says Steve Milton, a spokesman for eBay. “We have broader selection and hopefully better prices. We can take a healthy share of the import-buying market,” he says.

Shangpin is cut from a different cloth. It sells in-season, full-price fashion from 80 international designers, some of them sold exclusively in China. The average item costs $322, compared with only $25 at mass-market Vancl. Shangpin also has an outlet website that marks down some items but wants to stay away from the discount-driven model pioneered by Yoox.com and Net-a-Porter.

Revenues are modest: $30 million the past two years. Shangpin isn’t profitable, although Zhao reckons it should break even this year. What it does have, he says, is a gross profit margin of 40%. That compares with a 26% gross margin at Amazon, whose founder, Jeff Bezos, is cited by Zhao as a personal inspiration for his belief in serving the customer. “E-commerce is about service and quality. If we [only] compete on price, we can’t build an everlasting company,” he says.

His first startup in 2005 was a credit card payment system that he ran for three of China’s biggest banks, including China Construction Bank, his previous employer. The company, Vansky, also sold electronics and luxury accessories to platinum-card holders, giving Zhao valuable insights into how rich Chinese shopped online and how to set up secure payments. Vansky is run separately from Shangpin and had revenues last year of $160 million.

Zhao says the success of his first venture, which he started with his own savings, paved the way for Shangpin’s launch in 2010. “If you don’t have trust you can’t sell online,” he says. Shangpin’s most prolific customer, who lives in a small city in Sichuan Province, shells out thousands of dollars every month on new clothes. All orders are couriered by DHL, with a two-day wait and free returns.

Zhao says he has no plans to list Shangpin, in which he is the largest shareholder (see box) , in the next two years. He warns that Chinese startups may struggle to raise capital in 2013 after a dearth of successful VC exits but insists that he doesn’t face a funding crunch. “We’re very secure,” he says.

For its part, Vancl has faced a barrage of bad publicity over delayed deliveries and slowing sales. In January CEO Chen told Sina.com’s financial website that the company had sent all available staff to its warehouses to clear a massive backlog of orders affecting nearly half a million customers. Chen apologized for the delay.

He also said he was targeting 50% growth in revenues in 2013, similar to last year. However, Chinese news media have reported that third-quarter growth declined to 30% and that the company had ordered mass layoffs to cut costs. (The spokesman declined comment on redundancies and 2012 revenues.)

For a recent article in the licensed publication FORBES CHINA, Chen observed that his company’s aborted offering in 2011 may have been all for the better: “If we chose to go ahead with the IPO, with the capital market now, Vancl would not have become any healthier, and I would have been faced with more ridicule. I do a lot of thinking before taking each step.”

Further noting that total losses haven’t come close to the capital he’s raised, he added: “Today I think as long as Vancl keeps growing as a healthy company, it doesn’t matter whether we get listed or not.”

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.